A failure too big

Sunday

Feb 10, 2013 at 12:01 AM

Standard & Poor's disputes the claims. We would expect nothing less.

Standard & Poor's disputes the claims. We would expect nothing less.

Unfortunately, those relying on the well-known investment rating company expected much more. That they didn't get it is at the heart of a federal lawsuit and lawsuits from a host of states, including California, claiming S&P inflated ratings to keep its customers happy and capture market share.

The gold stars S&P handed out undermined the trust that is at the heart of our economy.

The obscene hubris of what S&P was about is encapsulated in what one company analyst wrote: "Let's hope we are all wealthy and retired by the time this house of cards falters."

That arrogance is reminiscent of the 2002 California energy crisis in which an Enron trader was taped bragging about "all the money you guys stole from those poor grandmothers in California."

Documents released by federal and state officials paint a picture of S&P analysts essentially mocking their role as the gatekeepers of the nation's financial system. They are paid - at least we thought - to accurately and honestly rate the quality of investments.

As might be expected, S&P accuses federal and state authorities of "cherry-picking" the documents, looking for the worst of the worst.

But the worst of the worst do have a way of driving home the point that something was terribly amiss. "Liar loan" mortgages were bundled up by banks, rated as high quality and then sold off to unsuspecting investors - or perhaps investors who were too greedy - as high quality.

Trillions of dollars in bogus investments were packaged that way and when they went south, they nearly took the world into a depression. Thus the phrase "too big to fail" entered the lexicon.

The U.S. Justice Department filed its civil fraud lawsuit in Los Angeles federal court. It seeks at least $5 billion in penalties. Several states also sued, including California which wants the company to fork over $4 billion - four times the amount the state claims that its public pensions, such as the California Public Employees' Retirement System, lost in the toxic investments.

Three questions:

» What took so long? These shenanigans were going on five or six years ago.

State officials said it took months and months of digging through thousands of documents to put together its case.

» Are the other big investment rating services, Moody's and Fitch, next?

Nobody's saying.

» Why are the rating companies the only ones with the targets on their back? Weren't the big investment firms and banks involved? Weren't they the ones knowingly packaging these dicey investments in the first place, and then handing them off to the investment raters with a wink and a nod?

We can only suggest you recall the phrase "too big to fail." There also is the belief in some quarters that to take down those responsible in the financial institutions would leave these big players rudderless, which might suggest another phrase: "too big to prosecute."

There is some irony in all this for California. Just days before state Attorney General Kamala Harris brought her suit against S&P, some state officials were citing S&P's decision to raise the state's credit worthiness rating as a sign California is back.

Of course, now we have to question if the whole thing isn't some analyst's attempt to have fun at California's expense. Again.